"Under no circumstances shall we recognize Israel (with the) United States saying east Jerusalem is annexed," Saeb Erakat said Thursday.
Trump pledged repeatedly during his presidential campaign to move the embassy to Jerusalem, which would make the US the only country in the world to have its embassy there. On Monday, the White House spokesman Sean Spicer said there were "no decisions" on the move yet.
Both Israel and the Palestinians claim Jerusalem as their capital, and Erakat said that by moving its embassy, the US would be insinuating that the two-state solution was dead.
Israel's ambassador to the United Nations said he was not buying into the PLO threat.
"Jerusalem is the capital of Israel -- period," Danny Danon told Amanpour Thursday, adding that his country "will welcome" a move of the embassy.
The PLO would consider Israeli Prime Minister Benjamin Netanyahu to then "be responsible for paying the salaries of teachers, doctors, garbage collection in the West Bank," the Gaza Strip, and Palestinian east Jerusalem, he told Amanpour.
The PLO would then also plan to ask the UN General Assembly to suspend Israel's membership in the UN.
The PLO first recognized Israel, and renounced terrorism, in 1988.
"With no two-state solution, no possibility for a Palestinian state, (Palestinians) will demand equal rights" with Israel, Erakat said.